Reviewed by Michael J Boyle
Airlines are notorious for having difficulty remaining profitable because of their high fixed costs, passenger spending habits, and seasonality in the industry. Determining whether a specific airline company is a good investment can be tricky, but many metrics can provide useful insights. One of these is the load factor. This indicator measures the percentage of available seating capacity filled with passengers. It is released monthly by the International Air Transport Association.
Key Takeaways
- The load factor is a metric used by the airline industry to measure the percentage of available seating capacity filled with passengers.
- Airlines with high load factors sell most of their available seats.
- The higher the load factor, the more an airline can spread its fixed costs among passengers.
- Investors and management can use the load factor to determine how well an airline generates sales, covers its expenses, and remains profitable.
- Airlines have thin profit margins with many costs so having a high load factor is essential to an airline’s success.
What Does a High Load Factor Indicate?
A high load factor indicates that an airline has full planes with most seats occupied by passengers. Airlines have high fixed costs associated with each flight. Every flight must have a full flight crew and support staff, a well-maintained aircraft with enough fuel, and services that entertain and comfort customers.
If only half of the seats on a flight are occupied, the airline is not generating as much revenue as it could by flying a full plane. The load factor may help investors understand how the airline covers expenses and generates a profit. A low load factor may be a cause for concern and may indicate an unprofitable airline.
Using Available Seat Miles With Load Factor
Available seat miles (ASM) may make the load factor more understandable. The ASM of an airline measures how many passenger travel miles are available at a given time. This statistic expresses the capacity of the airline. Higher load factor values make the airline more profitable by spreading fixed-cost expenses across more passengers.
Investors can use the load factor with the ASM to determine the revenue earned when planes are filled at a particular level. Airlines can cover fixed costs and begin generating profits at a certain amount of revenue per passenger. Investors may use this break-even point when evaluating how profitable an airline is.
Load Factor and Revenue
Airlines typically have thin profit margins and must have relatively high load factors to stay profitable. As of the third quarter of 2024, 75.5% of U.S. airline revenue is generated from passenger fares, baggage fees account for 3%, and change frees account for 0.4% of airline revenue. The bulk of the remainder of their revenue likely comes from cargo and freight services.
The vast majority of U.S. airline revenue is earned on domestic routes rather than on international ones. Of their $63 billion in operating revenue during the quarter, $45.9 billion of it came from domestic routes.
Note
The domestic and international load factor for U.S. airlines remained above 80% since the middle of 2009. This doesn’t include the COVID-19 pandemic period.
Load Factor and Costs
Having a high load factor helps airlines spread out fixed costs over more passengers, and therefore over more revenue. Taking a look at airline costs, we see that aircraft fuel and oil is by far the largest cost at 28.7%. Flight crew salaries and expenses make up 8.6% of costs, and flight equipment maintenance and overhaul accounts for 8.4% of airline expenses.
Break-Even Load Factor
The break-even load factor is often used by airlines in strategic planning. It is commonly used by industry players to determine ticket prices. The break-even load factor allows airlines to cover their operating costs.
An airline wishing to attract low-budget customers with cheap tickets will likely need a higher load factor to remain in the black and may need aircraft designed to carry more passengers. If an airline exceeds the breakeven point, that excess goes toward profit.
Pursuing service and a quality customer experience, the airline may decide to charge more per ticket and offer fewer seats while providing a higher level of comfort.
What Factors Affect the Airline Industry?
The airline industry is cyclical, which means it is directly tied to the business cycle and depends heavily on the economy. Some of the key factors that affect this industry include currency rates, geopolitical issues, labor shortages, energy prices and supplies, competition, and consolidation.
What Is the U.S. Airline Industry’s Load Factor?
The domestic load factor for the U.S. airline industry was 84.9% in August 2024. This data is from all U.S. domestic carriers of scheduled passenger flights.
What Are the Best Ways to Get the Cheapest Airline Tickets?
If you’re looking for the cheapest way to travel, consider following these tips:
- Fly early in the week. Airlines tend to make Friday and weekend flights more expensive.
- Book an early morning or late night flight as these tend to be cheaper.
- Low-cost carriers can help you save a lot of money.
- Be flexible with your travel times, dates, and airlines.
- Book as far ahead in advance.
The Bottom Line
There are numerous metrics to determine how profitable an airline company is, with the load factor being one of the most simple and informative. Knowing how many seats an airline fills helps provide insight to investors and management on how well the airline is doing in marketing, periods of seasonality, efficiency, revenues, and profit. The load factor shows the ability of an airline to drum up business and spread fixed costs across more passengers.